When using a moving average method described before, each of the observations used to compute the forecasted value

is weighted equally. In certain cases, it might be beneficial to put more weight on the observations that are closer to the time period being forecast. When this is done, this is known as a weighted moving average technique. The weights in a weighted MA must sum to 1.

Weighted MA(3) = Ft+1 = wt1(Dt) + wt2(Dt-1) + wt3(Dt-2)

Example: The demand for defense machinery for a certain project is given each month as follows: Month Demand 1 2 3 4 5 6 7 8 9 10 120 110 90 115 125 117 121 126 132 128

The defense officer is asked to forecast the demand for the 11th month using three period moving average technique. Solution: The defense officer has decided to use a weighting scheme of 0.5, 0.3, 0.2 and calculated the weighted moving average for the 11th month as follows.

Weighted MA(3): F11 = 0.5(128) + 0.3(132) + 0.2(126) = 64 + 39.6 + 25.2 = 128.2

WEIGHTED MOVING AVERAGE METHOD

This approach is based on the principle that more weightage should be given to relatively newer data. The forecast is the weighted average of data. Thus: Ft+1 = t i=t+1-n WiDi Period Actual Demand Weightage 1 10.5 0.1 2 108 0.3 3 112 0.6

What is the forecast for the 4th period Solution: The weighted moving average forecast for the 4th period. F4 = (0.1 105 + 0.3 108 + 0.6 112) = 110.1 In case of simple moving average, F4 = 1/3 (105 + 108 + 112) = 108.33 In case that weightage is 0.6, 0.3 and 0.1 in the above problem, F4 = (0.6 105 + 0.3 108 + 0.1 112) = 106.6 It may be noted that when more weight is given to the recent values, the forecast is nearer to the likely trend. Weighted moving average is advantageous as compared to simple moving average as it is able to give more importance to recent data.

WEIGHTED MOVING AVERAGE Whereas the simple moving average gives equal weight to all the data, the weighted moving average can give more weight to more recent data.
Let's move ahead into a different kind of moving averagea weighted moving average. Here we're able to put different weights on data from different periods. The

functional form is very similar, where the forecast at time period t is equal to the summation i equal 1 to n wt sub i times s sub t sub i, where s are the actual data, and w are weights that you put on those data. You can put for example heavier weights on more recent data if you feel that that will give you a better forecast. By default the simple moving average or single moving average has w equal to the same value for all the data, so all the data are equally weighted. It's the same as having w equal to 1 for all the data, or any other number actually, because we sum up the sum of the w's, so it just merely averages out at the end. But this is a weighted moving averageit gives you a way to put heavier weights on the more recent data if you feel that that would be appropriate to do.

A weighted moving average forecast model is based on an artificially constructed time series in which the value for a given time period is replaced by the weighted mean of that value and the values for some number of preceding time periods. As you may have guessed from the description, this model is best suited to time-series data; i.e. data that changes over time. Since the forecast value for any given period is a weighted average of the previous periods, then the forecast will always appear to "lag" behind either increases or decreases in the observed (dependent) values. For example, if a data series has a noticable upward trend then a weighted moving average forecast will generally provide an underestimate of the values of the dependent variable. The weighted moving average model, like the moving average model, has an advantage over other forecasting models in that it does smooth out peaks and troughs (or valleys) in a set of observations. However, like the moving average model, it also has several disadvantages. In particular this model does not produce an actual equation. Therefore, it is not all that useful as a medium-long range forecasting tool. It can only reliably be used to forecast a few periods into the future.

Forecasting involves the generation of a number, set of numbers, or scenario that corresponds to a future occurrence. It is absolutely essential to short-range and long-range planning. By definition, a forecast is based on past data, as opposed to a prediction, which is more subjective and based on instinct, gut feel, or guess. For example, the evening news gives the weather "forecast" not the weather "prediction." Regardless, the terms forecast and prediction are often used interchangeably. For example, definitions of regressiona technique sometimes used in forecasting generally state that its purpose is to explain or "predict." Forecasting is based on a number of assumptions: 1. The past will repeat itself. In other words, what has happened in the past will happen again in the future.

2. As the forecast horizon shortens, forecast accuracy increases. For instance, a forecast for tomorrow will be more accurate than a forecast for next month; a forecast for next month will be more accurate than a forecast for next year; and a forecast for next year will be more accurate than a forecast for ten years in the future. 3. Forecasting in the aggregate is more accurate than forecasting individual items. This means that a company will be able to forecast total demand over its entire spectrum of products more accurately than it will be able to forecast individual stock-keeping units (SKUs). For example, General Motors can more accurately forecast the total number of cars needed for next year than the total number of white Chevrolet Impalas with a certain option package. 4. Forecasts are seldom accurate. Furthermore, forecasts are almost never totally accurate. While some are very close, few are "right on the money." Therefore, it is wise to offer a forecast "range." If one were to forecast a demand of 100,000 units for the next month, it is extremely unlikely that demand would equal 100,000 exactly. However, a forecast of 90,000 to 110,000 would provide a much larger target for planning. William J. Stevenson lists a number of characteristics that are common to a good forecast:

Accuratesome degree of accuracy should be determined and stated so that comparison can be made to alternative forecasts. Reliablethe forecast method should consistently provide a good forecast if the user is to establish some degree of confidence. Timelya certain amount of time is needed to respond to the forecast so the forecasting horizon must allow for the time necessary to make changes. Easy to use and understandusers of the forecast must be confident and comfortable working with it. Cost-effectivethe cost of making the forecast should not outweigh the benefits obtained from the forecast.

Forecasting techniques range from the simple to the extremely complex. These techniques are usually classified as being qualitative or quantitative.

QUALITATIVE TECHNIQUES
Qualitative forecasting techniques are generally more subjective than their quantitative counterparts. Qualitative techniques are more useful in the earlier stages of the product life cycle, when less past data exists for use in quantitative methods. Qualitative methods include the Delphi technique, Nominal Group Technique (NGT), sales force opinions, executive opinions, and market research.

THE DELPHI TECHNIQUE.

The Delphi technique uses a panel of experts to produce a forecast. Each expert is asked to provide a forecast specific to the need at hand. After the initial forecasts are made, each expert reads what every other expert wrote and is, of course, influenced by their views. A subsequent forecast is then made by each expert. Each expert then reads again what every other expert wrote and is again

influenced by the perceptions of the others. This process repeats itself until each expert nears agreement on the needed scenario or numbers.

NOMINAL GROUP TECHNIQUE.

Nominal Group Technique is similar to the Delphi technique in that it utilizes a group of participants, usually experts. After the participants respond to forecast-related questions, they rank their responses in order of perceived relative importance. Then the rankings are collected and aggregated. Eventually, the group should reach a consensus regarding the priorities of the ranked issues.

SALES FORCE OPINIONS.

The sales staff is often a good source of information regarding future demand. The sales manager may ask for input from each sales-person and aggregate their responses into a sales force composite forecast. Caution should be exercised when using this technique as the members of the sales force may not be able to distinguish between what customers say and what they actually do. Also, if the forecasts will be used to establish sales quotas, the sales force may be tempted to provide lower estimates.

EXECUTIVE OPINIONS.
Sometimes upper-levels managers meet and develop forecasts based on their knowledge of their areas of responsibility. This is sometimes referred to as a jury of executive opinion.

MARKET RESEARCH.
In market research, consumer surveys are used to establish potential demand. Such marketing research usually involves constructing a questionnaire that solicits personal, demographic, economic, and marketing information. On occasion, market researchers collect such information in person at retail outlets and malls, where the consumer can experiencetaste, feel, smell, and see a particular product. The researcher must be careful that the sample of people surveyed is representative of the desired consumer target.

QUANTITATIVE TECHNIQUES
Quantitative forecasting techniques are generally more objective than their qualitative counterparts. Quantitative forecasts can be time-series forecasts (i.e., a projection of the past into the future) or forecasts based on associative models (i.e., based on one or more explanatory variables). Timeseries data may have underlying behaviors that need to be identified by the forecaster. In addition, the forecast may need to identify the causes of the behavior. Some of these behaviors may be patterns or simply random variations. Among the patterns are:

Trends, which are long-term movements (up or down) in the data.

Seasonality, which produces short-term variations that are usually related to the time of year, month, or even a particular day, as witnessed by retail sales at Christmas or the spikes in banking activity on the first of the month and on Fridays. Cycles, which are wavelike variations lasting more than a year that are usually tied to economic or political conditions. Irregular variations that do not reflect typical behavior, such as a period of extreme weather or a union strike. Random variations, which encompass all non-typical behaviors not accounted for by the other classifications.

Among the time-series models, the simplest is the nave forecast. A nave forecast simply uses the actual demand for the past period as the forecasted demand for the next period. This, of course, makes the assumption that the past will repeat. It also assumes that any trends, seasonality, or cycles are either reflected in the previous period's demand or do not exist. An example of nave forecasting is presented in Table 1.

Table 1 Nave Forecasting Period Actual Demand (000's) January 45 February 60 March 72 April 58 May 40 June

Forecast (000's) 45 60 72 58 40

Another simple technique is the use of averaging. To make a forecast using averaging, one simply takes the average of some number of periods of past data by summing each period and dividing the result by the number of periods. This technique has been found to be very effective for short-range forecasting. Variations of averaging include the moving average, the weighted average, and the weighted moving average. A moving average takes a predetermined number of periods, sums their actual demand, and divides by the number of periods to reach a forecast. For each subsequent period, the oldest period of data drops off and the latest period is added. Assuming a three-month moving average and using the data from Table 1, one would simply add 45 (January), 60 (February), and 72 (March) and divide by three to arrive at a forecast for April: 45 + 60 + 72 = 177 3 = 59

To arrive at a forecast for May, one would drop January's demand from the equation and add the demand from April. Table 2 presents an example of a three-month moving average forecast.

Table 2 Three Month Moving Average Forecast Period Actual Demand (000's) Forecast (000's) January 45 February 60 March 72 April 58 59 May 40 63 June 57 A weighted average applies a predetermined weight to each month of past data, sums the past data from each period, and divides by the total of the weights. If the forecaster adjusts the weights so that their sum is equal to 1, then the weights are multiplied by the actual demand of each applicable period. The results are then summed to achieve a weighted forecast. Generally, the more recent the data the higher the weight, and the older the data the smaller the weight. Using the demand example, a weighted average using weights of .4, .3, .2, and .1 would yield the forecast for June as: 60(.1) + 72(.2) + 58(.3) + 40(.4) = 53.8 Forecasters may also use a combination of the weighted average and moving average forecasts. A weighted moving average forecast assigns weights to a predetermined number of periods of actual data and computes the forecast the same way as described above. As with all moving forecasts, as each new period is added, the data from the oldest period is discarded. Table 3 shows a threemonth weighted moving average forecast utilizing the weights .5, .3, and .2.

Table 3 ThreeMonth Weighted Moving Average Forecast Period Actual Demand (000's) Forecast (000's) January 45 February 60 March 72 April 58 55 May 40 63 June 61 A more complex form of weighted moving average is exponential smoothing, so named because the weight falls off exponentially as the data ages. Exponential smoothing takes the previous period's forecast and adjusts it by a predetermined smoothing constant, (called alpha; the value for alpha is less than one) multiplied by the difference in the previous forecast and the demand that actually occurred during the previously forecasted period (called forecast error). Exponential smoothing is expressed formulaically as such: New forecast = previous forecast + alpha (actual demand previous forecast) F = F + (A F) Exponential smoothing requires the forecaster to begin the forecast in a past period and work forward to the period for which a current forecast is needed. A substantial amount of past data and a beginning or initial forecast are also necessary. The initial forecast can be an actual forecast from a previous period, the actual demand from a previous period, or it can be estimated by averaging all or part of the past data. Some heuristics exist for computing an initial forecast. For example, the heuristic N = (2 ) 1 and an alpha of .5 would yield an N of 3, indicating the user would average the first three periods of data to get an initial forecast. However, the accuracy of the initial forecast is not critical if one is using large amounts of data, since exponential smoothing is "selfcorrecting." Given enough periods of past data, exponential smoothing will eventually make enough corrections to compensate for a reasonably inaccurate initial forecast. Using the data used in other examples, an initial forecast of 50, and an alpha of .7, a forecast for February is computed as such: New forecast (February) = 50 + .7(45 50) = 41.5 Next, the forecast for March: New forecast (March) = 41.5 + .7(60 41.5) = 54.45 This process continues until the forecaster reaches the desired period. In Table 4 this would be for the month of June, since the actual demand for June is not known.

Table 4

Period January February March April May June

Actual Demand (000's) 45 60 72 58 40

Forecast (000's) 50 41.5 54.45 66.74 60.62 46.19

An extension of exponential smoothing can be used when time-series data exhibits a linear trend. This method is known by several names: double smoothing; trend-adjusted exponential smoothing; forecast including trend (FIT); and Holt's Model. Without adjustment, simple exponential smoothing results will lag the trend, that is, the forecast will always be low if the trend is increasing, or high if the trend is decreasing. With this model there are two smoothing constants, and with representing the trend component. An extension of Holt's Model, called Holt-Winter's Method, takes into account both trend and seasonality. There are two versions, multiplicative and additive, with the multiplicative being the most widely used. In the additive model, seasonality is expressed as a quantity to be added to or subtracted from the series average. The multiplicative model expresses seasonality as a percentage known as seasonal relatives or seasonal indexesof the average (or trend). These are then multiplied times values in order to incorporate seasonality. A relative of 0.8 would indicate demand that is 80 percent of the average, while 1.10 would indicate demand that is 10 percent above the average. Detailed information regarding this method can be found in most operations management textbooks or one of a number of books on forecasting. Associative or causal techniques involve the identification of variables that can be used to predict another variable of interest. For example, interest rates may be used to forecast the demand for home refinancing. Typically, this involves the use of linear regression, where the objective is to develop an equation that summarizes the effects of the predictor (independent) variables upon the forecasted (dependent) variable. If the predictor variable were plotted, the object would be to obtain an equation of a straight line that minimizes the sum of the squared deviations from the line (with deviation being the distance from each point to the line). The equation would appear as: y = a + bx, where y is the predicted (dependent) variable, x is the predictor (independent) variable, b is the slope of the line, and a is equal to the height of the line at the y-intercept. Once the equation is determined, the user can insert current values for the predictor (independent) variable to arrive at a forecast (dependent variable). If there is more than one predictor variable or if the relationship between predictor and forecast is not linear, simple linear regression will be inadequate. For situations with multiple predictors, multiple regression should be employed, while non-linear relationships call for the use of curvilinear regression. Read more: Forecasting - levels, examples, manager, definition, model, type, company http://www.referenceforbusiness.com/management/Ex-Gov/Forecasting.html#ixzz25Di5WUze

MA is a series of arithmetic means and is used if little or no trend is present in the data; provides an overall impression of data over time A simple moving average uses average demand for a fixed sequence of periods and is good for stable demand with no pronounced behavioral patterns. Equation:

F 4 = [D 1 + D2 + D3] / 4
F forecast, D Demand, No. Period (see illustrative example simple moving average) A weighted moving average adjusts the moving average method to reflect fluctuations more closely by assigning weights to the most recent data, meaning, that the older data is usually less important. The weights are based on intuition and lie between 0 and 1 for a total of 1.0 Equation: WMA 4 = (W) (D3) + (W) (D2) + (W) (D1) WMA Weighted moving average, W Weight, D Demand, No. Period